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Financial gloom pervades the global economy five years after crises struck in 2008. The medicine used to try to cure the malaise - bailing out failing banks and countries, flooding the financial markets with liquidity, and increasing government spending - are obviously not working. Instead of looking for a new prescription, the global leadership seems bent on increasing the dosage of the same medicine. More of the same won't revive the global economy but it will send it towards an inflation crisis, possibly next year.

In the closing days of 2012, the US Federal Reverse introduced a fourth round of "quantitative easing", only months after the so-called QE3. The measures are expected to push the Fed's balance sheet to US$4 trillion this year from its pre-crisis level of US$800 billion. Through its aggressive purchases of long-dated US Treasuries and mortgage-backed securities, the Fed has brought the costs of financing a property purchase to a new low. The US housing market is reviving. And the liquidity buzz is pushing stocks to record highs.

Fearing that markets may bubble up too quickly, the Fed signalled it may end the monetary expansion sooner than expected and talked tough on inflation. The mixed signals seem intended to control asset prices. Targeting asset prices looks like a new tool for the Fed to revive the economy.

On the other side of the world, "land kings" are returning to China's major cities. Their action encourages speculators laden with millions of empty flats who are waiting for higher prices, and brings fear to "bottom fishers" who hope for lower prices. The market revived in the fourth quarter.

This time around, the land kings are state-owned enterprises. By buying land from local governments, they help the government shift money from one market to another. Prices are being inflated. Such actions revive greed among speculators and instil fear among end-users. The Chinese government wants, using this technical improvisation, to guide the overheated property market to a soft landing.

The US and China are the two biggest economies in the world. Both are trying to control asset prices to manage their economies. The global economy depends on how effective their policies are.

Manipulating asset prices is like playing with fire. The people who play are either fools, or bubble chasers who want to make money from the fools. Whatever the benefits to the economy in the short term, this would be more than offset by the calamities that follow. In the current scenario, the calamity ahead is inflation. Printing money inevitably leads to inflation, and when asset prices are kept high, the lag time is shortened.

Inflation is already high in emerging economies, though their statistics don't fully reflect the fact. It takes longer for inflation to hit the developed economies, because they are more weighted towards the labour-intensive service sector and their labour market is still depressed. Inflation in emerging economies only becomes a crisis when their currencies tumble. That moment will arrive when the Fed has to raise interest rates quickly to counter inflation in the US. The Fed said that it would react if inflation rises above 2.5 per cent. But US inflation was already close to 2 per cent in 2012. It won't take much for it to breach 2.5 per cent. This is why the Fed is anxious that asset prices don't go up too fast. But history is not in its favour; prices rise quickly when the asset market is bubbly.

China will have a tougher job controlling its property market for two reasons. First, government officials probably own millions of empty flats. The recent internet exposé on officials with several flats has created fear among those yet to be exposed. If the market heats up, the torrent of sales will begin. Second, properties under construction - residential and commercial - exceed 10 billion square metres, according to the National Bureau of Statistics . No matter how successful the government is at manipulating expectation, there is just not enough money to marketise the inventory at the current price levels. Hence, any market revival, like the current one, would be short-lived.

China must face up to its vast property bubble and prepare for the consequences. For example, the banking system needs to be recapitalised. The sooner it is done, the better for the country.

Policymakers around the world resort to short-term measures to delay the inevitable. It symbolises a global leadership crisis. The people who led the global economy into the crises are trying to lead it out, but old dogs cannot learn new tricks.

Globalisation and technological advances have changed how an economy should be managed. A government's job is to keep the prices low and quality high of basic social goods like education, health care and housing. The labour market should be flexible, and an effective tax system is required to support low-income earners. The worst policy is to inflate the prices of basic goods for temporary gains. But that's what politicians are doing.

This year may seem like one when we muddle through, and a reminder of the good old days from time to time. But another crisis is in the making. Inflation may force the US Fed to raise interest rates quickly next year, which would cause a 1998-style emerging market meltdown.

Andy Xie is an independent economist

This article appeared in the South China Morning Post print edition as: